Home insurance market remains frustrating
by Joy Jordan The New Year did not bring good news on the homeowner’s insurance front. Cape Cod continues to see the effects of hurricane modeling; insurers are leaving this market and rates are continuing to rise.
“The market for homeowner’s insurance continues to worsen on Cape Cod,” said Chuck Robinson, president of Rogers & Gray Insurance Agency. “Even Bristol County and Plymouth County are seeing restrictions from insurance companies,” he noted.
Many firms are relying on modeling tools that predict costly hurricanes in coastal areas in the next few years. A number of insurers and reinsurers use a meteorological weather model called the Atlantic Multidecadal Oscillation, which forecasts peaks and valleys in severe hurricane periods that can be measured in three-decade intervals. This data has led to concern that coastal areas may be subject to devastating storms in the near future, and insurance companies are trying to preemptively mitigate their financial risk.
“Consumers have a right to be frustrated,” said Rob Miller, principal of Dowling & O’Neil Insurance Agency. “Rates have increased at least threefold over just a few years.”
On the other hand, Miller noted, insurance agencies and carriers are also taking a hit. “When we get actual reinsurance costs outlined to us, we see that reinsurers are taking a larger portion. Carriers are paying out even larger amounts to reinsurers, so costs go up overall. In addition, carriers are reducing commissions to agents, generally even more than the rate increases for homeowners.”
FAIR plan is the safety net
In addition to seeing rate increases, more and more Cape Codders – especially second-home owners – are being dropped by their insurance companies. Unable to find new companies to write their policies, they are forced to join the Massachusetts FAIR plan. Originally developed after the Watts riots in the 1960s to help rebuild damaged urban areas, the FAIR plan provides basic insurance on eligible property for applicants who have been unable to gain insurance through the private market.
While FAIR plan rates are high cost – and recently increased another 25 percent – they remain a competitive option.
“Reinsurance costs have forced several insurers to pull off the Cape entirely, while the insurers that have remained have needed to increase their premiums to offset their increased costs,” said David Lofstrom, regional vice president for Cape Cod, TD Banknorth Insurance Group.
“This has created an interesting dynamic relative to the FAIR Plan because even with its 25 percent price increase last October, it still remains in many cases the cheapest consumer option for homeowner’s insurance on the Cape.”
The FAIR plan on the Cape and Islands has grown from covering 4 percent of homes in 2000 to 40 percent today.
“Besides the homeowner’s insurance market, the insurance companies that write commercial risk insurance are also increasing wind deductibles, raising rates, and in many cases, for property risks with high values, not renewing their polices,” said Robinson.
There are carriers still competitively writing policies here, at rates less than the FAIR Plan, noted Miller. “Generally, unless they are within half-mile of the water, we can find our clients a carrier other than the FAIR Plan. But either way, they are almost always going to pay more than in the past.”
Some states – and homeowners – fighting back
As part of this trend, many insurers are requiring homeowners to undertake storm-proofing measures to retain their policies. Homeowners may be required to install impact-resistant glass and storm shutters to avoid window breakage; hip roofs to reduce the amount of surface area for the wind to lift roofs; and exterior doors that swing out to provide greater resistance to wind and rain.
Some states are fighting back: Connecticut is getting tough with insurers that are abandoning customers close to the coast.
Its insurance commissioner Susan F. Cogswell issued rules that restrict a company’s ability to drop customers or reject applicants within 2,600 feet of the shore. They also will force some insurers to revise their underwriting guidelines.
The commissioner also proposed a “coastal market assistance plan,” which could be up and running in 90 days to help homeowners find an insurer if several others have turned them down.
Under the new rules, insurers are forbidden from dropping at renewal time shoreline customers who don’t install shutters or undertake other mitigation efforts.
Instead, customers will be able to accept a special deductible on hurricane damage, in addition to the policy’s regular deductible.
Insurers will still be allowed to reject applicants for new policies within 2,600 feet of the shore if the applicants refuse to install mitigation, which doesn't have to be permanent shutters. Companies can also impose hurricane deductibles on new customers.
On the Cape, Eastham resident Paula Aschettino formed a group in late 2006 called Citizens For Homeowners Insurance Reform. The group is undertaking education efforts and investigating possible lobbying to combat these recent trends in the homeowner’s insurance industry.
However, cautioned Miller, this type of activism could end up having unintended results. “Insurers don’t need to be writing policies here – if insurers are forced to write in wind-prone areas, they could elect not to write here at all. They can walk away. That could create a situation with even less competition and even higher prices.”
Are buyers turning away?
Does the insurance situation on Cape Cod affect buyers’ decisions to purchase homes here?
Opinions are mixed. Jack Cotton of Sotheby’s International Realty told the New York Times that the cost of home insurance has not deterred vacation home buyers, but he recommends clients begin the search for insurance much earlier in the homebuying process.
Robinson said, “I can tell you that the cost of homeowner’s insurance in many cases has doubled or tripled over the last couple of years. A policy that was once $500 to $600 three years ago can be $1,200 to $1,800 today.” Directly or indirectly, insurance rates affect the cost of living here on the Cape, and that will always be a factor in decisions to buy.
“I don’t think the increasing cost of homeowners insurance is a material factor in deciding to by a house on the Cape,” said Lofstrom. “However, I do think it compounds the fact that the Cape and Massachusetts in general is an expensive place to live. The high cost of real estate, real estate taxes and quality of life in general are greater factors, in my opinion.”
The class of homeowner drawn to waterfront property may be less impacted by these changes, said Miller. “I think the type of buyer to buy close enough to the water to have a major problem with insurance is the type of buyer that isn’t affected by the rate increases.”
Is auto reform the answer?
It is often speculated that Massachusetts’ strict auto insurance regulations hinder the home insurance situation. The theory is that large companies that write both policies may elect not to serve consumers for only home insurance if they can’t write auto policies as well.
“I think continued reform with Massachusetts auto insurance would help in bringing additional homeowner’s capacity to the Cape,” said Lofstrom. “There are large national carriers that won't write here as a result of our state-dictated rate structure. With change to a more competitive market system, these carriers would bring homeowner’s capacity along with their auto.
“This would be helpful to the consumer as there would be more choice and competition among carriers for their business.”
However, Robinson is not certain there would be much impact from auto insurance reform. “Unfortunately, the homeowner’s situation is very much unrelated to the auto situation in Massachusetts,” he said. “Many of the large national auto insurance companies like Geico and Progressive do not write homeowners insurance at all.
“Those national companies like Nationwide, Allstate and State Farm that do write homeowner’s insurance have restricted the number of homeowners that they write in coastal states, and in many cases have non-renewed homeowners’ policies,” Robinson noted. “The homeowner’s situation on Cape Cod is not unlike what is happening in all of the Atlantic Coast states.”
Miller is even more definitive: “The correlation between auto and home insurance in coastal regions is ludicrous – there is no relevance. Most major carriers that would enter the state for auto are not homeowner’s carriers. Auto reform is not a factor.”
So what is the solution?
The consensus is that a few hurricane-free seasons will help matters immensely. This may cause the modeling systems to reevaluate their data and allow insurers and re-insurers to feel more confident about writing policies in coastal areas.
“It is possible that if we have a couple of more good years with the lack of numbers and severity of hurricanes along the coastal areas of the U.S., reinsurance rates could be reduced,” said Robinson.
The situation may have reached its nadir, said Miller. “After this next round of rate increases this year, I think the market will settle down. It’s not going to get much worse – barring a major storm affecting the Northeast.”
Originally published in the March/April 2007 issue of Cape Business.
Joy Jordan is managing editor of Cape Business magazine. She has worked in the technology and publishing industries and was chief copy editor for Cape Cod Community Newspapers. 
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